India’s trade deficit may turn volatile due to Red Sea danger: Nomura

New Delhi : India's trade deficit may turn volatile in the coming months given the supply-side disruptions in the Red Sea due to the attacks on commercial ships by Houthi rebels in retaliation to Israel’s action in Gaza, according to a report by Global Investment Bank, Nomura.

The report said that India’s merchandise trade deficit narrowed to $19.8 billion in Dec from $20.6 billion in November as exports posted a 0.96 per cent growth while imports contracted by 4.9 percent.

“However, with the escalation in the Houthi attacks in the Red Sea, ships are now being forced to avoid the Suez Canal route to Europe. This impact is expected to show up in a slowdown in exports during Jan,” the report said.

It said that the sharp rise in transit costs and transportation times are likely to hit Indian trade, especially with Europe and the US, with news reports suggesting that some 65 per cent of exports to Europe are now having to use the longer route around the Cape of Good Hope.

“Surging freight and insurance costs are likely to hit exports, already evidenced by news reports that daily petroleum exports to Europe have fallen by over 70 per cent,” it said.

Nomura estimates that the current account deficit (CAD) will widen to 1.6 per cent of GDP in Q4 of 2023-24 from 1 per cent of GDP a quarter ago. Overall, despite the geopolitical tensions, they estimate that CAD will fall to 1.1 per cent of GDP in FY24 from 2 per cent of GDP in FY23.

It said that Europe typically accounts for 15-16 per cent of Indian exports, while the US accounts for 17-18 per cent. The report said that the rising cost of logistics and a possible escalation in crude oil prices could lead to an increase in the country’s import bill. “If exports fall sharply while the cost of imports escalates, then the merchandise trade deficit can widen,” Nomura report said.